Germany Tumbles Down Into Recession

What Is Happening?

Fall in the industrial production in Germany has landed the nation into recession. As defined by National Bureau of Economic Research (NBER)’s Business Cycle Dating Committee, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators (Fund).

A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough (Fund). A fall in the GDP over six months or two quarters directs the economy into recession. The Deutsche Bundesbank (central bank of Germany) has reported a fall in Germany’s GDP by 0.1% in the three months from April to June within its second consecutive three-month period (Hawker).

How Did Germany Fall into Recession?

A Recession can be triggered due to various reasons like a fall in aggregate demand, that is when consumers stop purchasing good and services at the rate they were buying before or when exports fell sharply(trade shock), or even when there is a supply shock which happens when production falls.

Germany’s exports which are nearly 47% of the country’s GDP, are heavily affected due to Brexit and the US-China trade war, leading to a drop-in demand (Khan). The weakening of its export industries is due to fall in the car production which decreased the nation’s exports by 1.5% in the first six months of 2019.

The US and China Trade War

Donald Trump’s decision on imposing another ten percent tariff on the existing tariff of 10% Chinese goods starting September 1 affected Europe especially Germany which trades both with the US and China (Noack)Even though the USA imposed tariffs on steel and aluminium imported from the European Union it did not hinder Germany’s growth substantially. Both the USA and China are Germany’s third-biggest export market due to which contraction of any of these countries’ economy would disturb Germany.

Brexit

Weaker sales with Britain are one of the reasons why Germany is having a hard time. Exports to Britain fell by 15% by year on year in the second quarter according to the Federal Statistics Office in Germany. German exports to Britain accounted for 6% of total sales making the United Kingdom the fifth most important country for Germany. Also, Britain’s market is considered as one with the highest profit margins. Only one in five German companies still report good business in the United Kingdom according to IHK Business Survey Going International 2019 (Survey)whereas the metal industry, automotive industry, suppliers and retail trade are being heavily affected by approximately 71% (Survey). The British pound faced a decrease in its value in terms of purchasing power against the European Union which reduced sales opportunities for the German producers. Klaus Winker, CEO of Heller company which specialises in the production of crankshaft machines said: “Britain’s bid to leave the EU was “a pain in the neck” (Romei). German exporters incurred loss worth over $3.85 billion on account of the Brexit.

What Is Required?

Germany should adopt countercyclical fiscal policies which will help to recover the economy as these have the opposite effects to current policies. For instance, government investment should be increased and taxation on incomes should be reduced. In 2009 Germany came up with a “debt brake” policy which limits the structural deficit by the government to 0.35 % of GDP and a “black zero” policy of balancing the budget (Frankel). Since Germany has tumbled into recession there is a dire need to have infrastructural improvements to initiate private investments. According to BDI chief Joachim Lang the government should borrow at negative rates, from financial markets and obtain “a double-digit billion amount in the medium term” for a state venture fund; it should also cut taxes for businesses by 15 to 20 billion euros ($17 billion to $22 billion) to stimulate private investment. (Bershidsky). According to the report published by the Organisation for Economic Cooperation and Development (OECD) in 2016, Germany had the highest taxation after Belgium in Europe which is about 49.4 % on labour income (OECD). Currently, the tax rate prevails at 45% for income above 265,327 euros.

Admitting more foreign students into the country can help as well. In the winter semester, Germany had approximately 282,002 foreign students (Grote). International students not only increase the workforce of the population but also bring in greater revenues for the universities to function thereby accelerating the economy. But migration in Germany has also become a major political issue. To retain international students the country will have to become more acceptable for those from a foreign land which will prove to a big decision in Markel’s economy given the Right-Wing pressure and turn down economy.